Third Circuit Opinion Involving Uber Only Adds More Questions to the Dispute Over the Scope of the FAA Section 1 Residual Clause

Recent decisions have cast doubt on the enforcement of arbitration clauses in the context of the interstate transportation of goods, but will those limitations extend to the transportation of passengers? And what if the movement does not cross state lines?

In a Sept. 11, 2019, opinion, the Third Circuit found that the residual clause of the Federal Arbitration Act’s (FAA) Section 1 “may extend” to a class of Uber drivers “who transport passengers, so long as they are engaged in interstate commerce or in work so closely related thereto as to be in practical effect part of it.” Singh v. Uber Technologies, Inc., Case No. 17-1397 (3d Cir. Sept. 11, 2019).

Judge Joseph A. Greenaway, Jr., wrote for a three-judge panel of the court in vacating the District Court’s order, which had sent the dispute to arbitration. And because no filings could resolve the interstate-commerce issue, the case was remanded for further proceedings – including discovery before additional briefing.

We have previously written about the impact of New Prime v. Oliveira, No. 17-340, 139 S. Ct. 532 (Jan. 15, 2019), and the uncertainty it created. See our Jan. 17, 2019, March 12, 2019, and April 29, 2019, blog posts on the issues raised by New Prime and its progeny in the transportation industry.

The Proceedings Below

Jaswinder Singh initially filed the action in New Jersey state court alleging that Uber Technologies Inc. (Uber) misclassified its drivers as independent contractors rather than employees, causing them to be denied overtime and proper reimbursement for business expenses. Uber removed the action to federal court and sought to compel arbitration of the dispute.

While the District Court ultimately granted Uber’s motion, it did not reach the “engaged-in-interstate commerce inquiry.” The court instead went down a path that others have considered – that the residual clause of Section 1 only applies to transportation workers who transport goods, not passengers. The Third Circuit panel disagreed.

The Appeal

Section 1 excludes from the FAA’s coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. §1. But the dispute specifically centered on what is known as the “residual clause” – the “any other class of workers” portion.

Premised on this vintage precedent, the panel held that all transportation workers in interstate commerce could be excluded from the FAA. But to make a final determination, discovery was necessary. Singh’s affidavit in the District Court only stated that he often transported passengers on the highway from New York to New Jersey. So, to make a coverage decision, the District Court may need to consider the parties’ agreement, information regarding the industry, information about the work being performed, as well as other laws, dictionaries and materials discussing the parties and their work. Slip Op. 32-33.

The panel also instructed the District Court that if the FAA were applicable, any other questions must be reserved for the arbitrator. These would include arguments that the arbitration agreement is unenforceable because (1) it did not include a valid waiver of the right to a jury trial, (2) it violated the National Labor Relations Act, the Norris-LaGuardia Act, or the New Jersey Wage and Hour Law, and (3) it was unconscionable.

Judge David J. Porter concurred in part with the panel’s decision but wrote separately to explain why the transportation of goods versus passengers distinction that Uber advocated does not fit with the text of Section 1 of the FAA. And Judge Porter disagreed with his panel members that the parties should immediately begin discovery on remand. Instead, he believed,

“if there exists a valid alternative basis on which the District Court could compel arbitration, it may be more efficient to decide that question first, before allowing discovery on the §1 issue.”

In reaching that conclusion, he cited four decisions, including Palcko v. Airborne Exp., Inc., 372 F.3d 588, 596 (3d Cir. 2004), which enforced an FAA-exempt arbitration agreement under state law.

Finally, even though the Singh opinion analyzed many arguments and significant precedent, it did little to clarify the scope of the Section 1 exemption. Indeed, the decision, together with pending California legislation on who is an employee versus who is a contractor, only adds more uncertainly, particularly for those in the gig economy. And the FAA scope question is not likely to go away anytime soon, because it is also being raised in cases now before the Seventh and Ninth Circuits. See Wallace v. GrubHub Holdings, Inc., Case Nos. 19-1564 & 19-2156 (7th Cir. Docketed Mar. 28, 2019) (whether drivers who deliver takeout orders from restaurants to consumers are not transportation workers “engaged in the movement of goods in interstate commerce” and do not qualify under the Section 1 FAA exemption); Rittmann v. Amazon.com, Inc., No. 19-35381 (9th Cir. Docketed May 3, 2019) (whether local delivery drivers in the Los Angeles area are “engaged in * * * interstate commerce” within the meaning of Section 1 and not subject to the FAA).

BOTTOM LINE:

The Third Circuit panel found that the FAA Section 1 residual clause “may extend to a class of transportation workers who transport passengers” and remanded the case for additional discovery to address the “engaged in interstate commerce inquiry.”

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